CFM72080 | Other tax rules on corporate finance: securitisation: background: synthetic securitisation: example

Synthetic securitisation

Diagram of a synthetic securitisation

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A synthetic structure is used where no assets are sold by the originator.

A charitable trust is formed that owns the equity in an issuer SPV.

The originator enters into a credit default swap with the issuer SPV. For example, the originator pays premiums to the issuer SPV and in return receives protection against future default from the issuer SPV.

The issuer SPV sells securities (offering interest and principal) along with credit derivative premiums to third party investors and credit derivative counter-parties.

The proceeds from third party investors and credit derivative counter-parties from the sale of the securities and credit derivative premiums are paid to the issuer SPV.

The proceeds from the sale of securities are deposited by the issuer SPV with a collateral provider, in return for which the collateral provider pays interest to the issuer SPV. The principal deposited with the collateral provider is used to fund payments due to the originator by the SPV under the credit default swap and any remaining collateral is returned as principal on repayment of the securities.